The Battle Lines Are Drawn

Transocean has made its position clear. Will BP triumph?

Jim Mueller, CFA
Jim Mueller, CFA
Nov 2, 2011 at 12:00AM

This article is part of our Rising Star Portfolios series.

The gushing continues from the Gulf of Mexico oil well. Not oil this time, but words in court.

BP (NYSE: BP) and Transocean (NYSE: RIG) are locked in a battle over who owes what to whom, and words are spilling out faster than the oil was after the Deepwater Horizon sank in 2010. BP argues that Transocean is responsible for some of the costs for the cleanup; Transocean responds, "In your dreams."

Yesterday, Transocean filed papers in federal court clearly stating its long-held position that the indemnity clauses in its contracts with BP mean that BP is responsible for the costs of cleanup, fines, and penalties. According to The Wall Street Journal, Transocean asked BP in its filing, "Why have you signed so many contracts, reviewed by an army of your lawyers and businessmen, that you have no intention of honoring? The answer is simple: money." Wow. I bet that shot singed BP's nose hairs as it went by.

BP countered, saying that Transocean is "putting its own interests ahead of the people and communities of the Gulf." Of course it is. That's what companies do. And BP shouldn't pretend it doesn't. The whole point of fighting Transocean over this issue is so that BP ends up paying less to those selfsame people and communities.

At least one legal expert says that BP is whistling in the dark. In commenting that BP is going to have a hard time convincing a judge that good public policy means Transocean should pay, Blaine G. LeCesne of Loyola University New Orleans College of Law said, "There is nothing in the law that supports that perspective."

If BP wins, I would expect that to have a huge effect upon contracts between companies of all types, not just oil companies and drill rig operators. If I ran a company providing a service to another company and could no longer rely upon indemnity clauses for protection, I'd significantly increase what I would charge to compensate for the increased financial risk my company would be taking on. And that's not good public policy, either.

BP has already settled with Anadarko Petroleum (NYSE: APC) regarding its role in the disaster. It and Haliburton (NYSE: HAL), the company responsible for cementing the well, are still duking it out in court. I can certainly understand why BP is locked in legal battles with its various partners and contractors over the incident, but in this case, I hope it loses.

Transocean is a holding of my Messed-Up Expectations portfolio. Come and discuss this situation on my Messed-Up Expectations discussion board, or follow me on Twitter.

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